Stock Watchers Keep Eye on Stores

NEW YORK - How frequently cash registers scream ka-ching on Black Friday and the rest of the holiday shopping season could determine if investors will continue to see profits in their stock portfolios.

With the economy trying to shake off a nearly 2-year-old recession, and with stocks up more than 60% since early March after Monday's 1.4% rally, the next catalyst for stocks could be the all-important holiday gift-buying season.

Since consumers account for nearly 70% of U.S. economic activity, readings on retail sales over the final five weeks of 2009 will provide investors with a glimpse into the health of the economy and the ability and willingness of consumers to open their wallets and spend. More important, how holiday sales go could offer clues as to whether the fledgling economic recovery is sustainable.

"This year Black Friday (and holiday) sales will have a little extra meaning," says Timothy Vick, a portfolio manager at Sanibel Captiva Trust. "Investors are looking at the Christmas shopping season as the first barometer to see if the consumer is patching up" their finances.

Without a rebound in consumer spending, Vick says, it will be harder to sustain economic growth and the budding recovery in corporate earnings.

U.S. consumers are expected to spend $437.6 billion in the November and December period, a 1% drop from $442 billion last year, according to the National Retail Federation. Six out of 10 consumers (61 said they would only buy goods "on sale," a survey by NPD Group found.

Rick Bensignor, chief market strategist at Execution, downplays the impact of the holiday sales season, arguing that the market is being driven by other key catalysts, such as the declining value of the dollar, which has fueled risk-taking in stocks.

While few on Wall Street expect a super sales season, any major surprise could move markets.

"Black Friday will be very important and could be one of the most significant (year-end) events," says Sung Won Sohn, a finance professor at California State University. "If sales exceed expectations it would be a shot in the arm for financial markets. On the other hand, if sales turn out to be worse than expected, the market will be disappointed."

Robust sales would deliver a positive message about consumers' state of mind, says Quincy Krosby, a market strategist at Prudential Financial. Consumers have been hard hit by the recession, job losses, falling home values, tight credit and high debt.

"It will send a signal that the consumer has a bit more confidence in the economy and the job landscape," Krosby says.

Krosby will be watching to see if parents are snapping up "must-have gifts" for kids: "If you don't see those must-haves selling, then you know the American consumer is still worried."